Auto dealerships pace stalling commercial sector

After a fast start the commercial sector, which includes retail, warehousing, and parking, now lags the rest of the nonresidential market. The outlook through 2006 is for only a 5.4% annual growth pace (3.0% after inflation). Construction spending on commercial buildings is 15% above the cyclical low early in 2003, but has been stalled for six months, not even keeping up with rising materials cost.

The fastest growth segments in recent months have been auto dealerships, big-box retailers, shopping centers (not malls), building supply stores, mini-storage buildings, and parking facilities. Construction spending for food and drug stores has been noticeably weak.

Commercial construction got an unusually early and large boost in this economic expansion from the multiple tax cuts that spurred consumer spending and the cheap credit that set off a housing boom. The tax cuts and cheap credit, which initiated the expansion in 2001, continued through the middle of last year. Commercial buildings were added to serve new residential neighborhoods and the surge in consumer spending, while most of the rest of the nonresidential market was not yet expanding.

The commercial market still has some momentum left from the earlier economic stimulus but the peak growth rate in this business expansion is past. Commercial warehouses, upscale retail stores, and restaurants are likely to be the fastest-expanding segments in 2005–06.

Warehouse space needs will be rising with expanding inventory. Inventories are currently relatively lean and will increase 10–12% in 2005–06, parallel with factory production and foreign trade volume.

Upscale retailers, including restaurants, increased their sales three times faster than discounters at the end of last year and will continue to gain market share, as they always do at the mature end of the economic expansion when more confident consumers stop pinching pennies. Restaurant construction will also be spurred by the 4–5 million new jobs added in 2005–06.